AN EXAMINATION OF THE RELATIONSHIP BETWEEN BANKING SECTOR PROFITABILITY AND ECONOMIC POLICY UNCERTAINTY USING PANEL DATA ANALYSIS

This study investigates the impact of increased economic policy uncertainty following the 2008 global financial crisis on the profitability of the banking industry. The study employs the panel data analysis technique, encompassing a sample of 25 nations and a time period spanning from 2008 to 2021. In the study, the Economic Policy Uncertainty (EPU) index developed by Baker, Bloom and Davis (2015) was used as the main independent variable, while net interest margin (NIM), return on assets (ROA) and return on equity (ROE) were considered as indicators of bank profitability. In addition, the World Uncertainty Index (WUI) and Credit Default Swap (CDS) were included in the model as control variables. Methodologically, Westerlund cointegration test, Mean Group (MG) and Fully Modified Ordinary Least Square (FMOLS) estimators were used. The analysis results reveal that there is a long-term and significant relationship between EPU and bank profitability indicators. The findings show that the increase in economic policy uncertainty generally negatively affects bank profitability. In particular, increases in EPU are found to have a statistically significant and negative effect on ROA and ROE. This work contributes to the literature on understanding the effects of economic policy uncertainty on the financial system, with crucial implications for policymakers. The results highlight the importance of reducing economic policy uncertainty for financial stability and suggest new perspectives for future research.